Qualified Domestic Relations Order (QDRO)

 

Retirement accounts that are built up during the course of marriage is community property. A QDRO is a court order establishing the right of a former spouse to receive a specified portion of the individual’s retirement plan.

 

Although a divorcing couple may come to an arrangement regarding distribution of their marital assets, including either party’s retirement plan, the actual division or payout of the plan must be put into a special court order called a QDRO. The QDRO is made in addition to the final divorce decree (judgment).

 

In order to prepare the QDRO, an attorney must gather (1) the name of the plan, (2) the name of the plan administrator, (3) a copy of the summary of the plan and (4) the QDRO procedures.

 

Preapproval is desirable, because it often speeds up the process of receiving final approval. Once the order makes it through the court system and receives the judge’s endorsement, it is far more likely that the plan administrator will have no issues.

 

Dividing Retirement Benefits Without a QDRO

 

Even individuals who have a retirement plan that would normally require a QDRO to be divided can avoid dealing with the plan directly. This is commonly done with a buyout agreement, in which the employee spouse keeps his or her retirement plan intact and pays the former spouse the value of his or her interest in the plan as a cash payment, or relinquishing his or her ownership interest in another marital asset (family home). The advantage to this type of division of a retirement plan is that it avoids penalties and tax consequences of dividing the play itself. Both spouses must agree to the buyout, which is put into writing as part of the divorce order.

 

How Do I Get Information About My Spouse’s Retirement Plan?

 

Call you spouse’s employer (human resource department) to find out who administers the pension plan. You should be able to obtain the general contact information for the pension plan administrator. Ask for a copy of the summary plan description and a statement of the participant’s benefit entitlements.

 

Legal Requirements for a QDRO

 

Every QDRO must meet specific legal requirements described in the IRS Code Section 414(d). These requirements include:

1. The QDRO must make provisions for child support, spousal support, and marital property rights of a former spouse or child dependent of the plan participant.

2. The QDRO must specify the alternate payee’s right to receive all or part of the participant’s benefits under the plan.

3. The QDRO must specify the SSN, name and last known mailing address of the plan participant, and the alternate payee.

4. The QDRO must specify the amount or percentage of the plan participant’s benefit to be paid to the alternate payee.

5. The QDRO must specify the manner in which the amount or percentage is to be paid to the alternate payee.

6. The QDRO must specify the number of payments or number of pay periods to which the divorce order relates.

7. The QDRO must specify each of the employee’s qualified retirement plans that are subject to the Order.

 

A QDRO cannot:

1. Require the retirement play to pay increasing benefits to the alternate payee.

2. Require the retirement plan to pay benefits to a new or different alternate payee once an alternate payee has been named.

3. Require the retirement play to provide a type of payment or form of benefit not otherwise provided by the plan.

 

QDROs and domestic relations

 

In the event that a spouse does not pay child or spousal support as dictated in the divorce decree, a QDRO can also be used to pull money from retirement accounts, in order to cover these expenses. This situation is much trickier than usual, so you should be certain to understand the tax implications. In spousal support, the recipient assumes tax liability, but child support is the opposite.

 

Common QDRO Mistakes

1. Misunderstanding the type of plan to be divided.

   • Include the plan type in your agreement if it is not part of the name of the plan (e.g., defined benefit plan, defined contribution plan)

   • Describe in the agreement if the receiving party will get a lump sum now, a lump sum at a future date or payments over time and when those payments will begin and end.

2. Not using the correct name of the plan—be specific (e.g., 401K, pension).

   • Get a statement and Summary Plan Description for each plan

   • Contact former employers to uncover any plans not disclosed or known by the parties

   • Obtain contact information for the person that will implement the QDRO for the company, which may or may not be the plan administrator.

3. Trying to divide non-divisible plans

   • Find out if your clients have any non-ERISA plans

   • Determine the options for division, if any, provided by the non-ERISA plan

   • Know if there is a survivor benefit option

   • If division is not an option, attempt to negotiate a credit against other assets

   • Consider using a trust or alimony as a means to equalize non-ERISA plan benefits

   • Retain a joint QDRO expert to help craft a resolution that can be implemented

4. Not setting a clear date of division

   • Agree upon a date to be used for the QDRO

   • Utilize a date on the first or last day of the month to simplify the implementation of the QDRO

5. Not addressing gains/earnings and losses in defined contribution plans

   • Do not include references for earnings or losses in defined benefit plans

6. Failing to address surviving spouse issues—survivor’s benefit

   • Neglecting how a survivor benefit election has been or will be made is a major area of malpractice claims as well as one of the most litigated areas in QDROs.

   • If an irrevocable election has already been made waiving spousal benefits, not even a Court order would change the election. In this scenario, you should consider obtaining a permanent life insurance benefit to protect your client’s interest.

   • Determine if the participant already made an election that’s irrevocable. If they made the election for a survivor annuity, there is no issue.

   • Find out if there is an option for a separate interest. A separate interest allows the alternate payee to have their own pension benefit completely dissociated with the participant. This is the best option since it completely divorces the parties from one another as it relates to the plan.

   • If only a shared interest survivor annuity election is an option, elect that. Also determine if there are qualified pre-retirement survivor benefit (QPSA) elections and agree upon how they will be handled. For example, if participant dies prior to retirement, the alternate payee may get nothing or a QPSA benefit.

7. Incorrectly handling the equalization of multiple plans

   • Do not attempt to equalize defined benefit plans and defined contribution plans

   • Do not equalize “Roth” accounts with non-Roth accounts

   • Identify which plan will be subject to the QDRO

   • State if the amount will be adjusted for gains/losses

8. Ignoring loan balance

   • The QDRO must address loan balances, if any.

   • The QDRO should also include language that protects your client from diminution of value that would occur if additional loans were taken that you may be unaware of.

9. Not stating who will draft the QDRO

   • Agree on the party responsible for drafting the QDRO

   • State if the plan participant will be required to complete any forms, and if so, the number of days they have to complete and return those forms.

   • Set a timeline for when the QDRO must be pre-approved by the plan administrator.

   • State in your agreement which attorney will submit the QDRO for the judge’s signature.

10. Failing to address if the plan administrator provided forms should be utilized

11. Not determining how fees will be paid

    • Clearly state in the agreement if plan-provided forms should be used.

    • Agree on how the participant QDRO fee taken by the plan provider will impact distribution.

12. Not implementing the QDRO

    • Implement the QDRO right away, don’t wait you survivor benefits may be jeopardized.

    • Have a process in place to follow up on all agreements where QDROs are required or hire a firm that provides you notice on every file so you are kept abreast of the status.

    • Be sure to include a return receipt with your QDRO attesting to the fact that the plan administration received the QDRO and that the administrator is the entity required to receive the QDRO.